Wealthfront Review and Complete Guide – Passive Investing in 2020

Wealthfront Review and Complete Guide – Passive Investing in 2020
Wealthfront Review and Complete Guide – Passive Investing in 2020
Wealthfront Review and Complete Guide

In a sea of Robo advisors, a few “big fish” stand out. Wealthfront is one of them, offering a focus on setting and reaching your goals and taking into account your entire financial picture. The service has a huge appeal for Millennials — after all, they have time on their side when it comes to saving for retirement. But there’s enough here for anyone who’s interested in growing their wealth through automated investing. So let’s start with deeper Wealthfront Review and Complete Guide.

With low fees (free for accounts with less than $10,000) and a stellar selection of features, Wealthfront is one of the best players on the Robo investing scene. However, some sophisticated investors might find its features lacking.

In fact, TheCoinrise rate Wealthfront as one of the best Robo advisors on the market. Let’s take a further review at this platform to find out why.

Review What Is Wealthfront?

Wealthfront is one of many Robo advisors on the market. These automated investing platforms have democratized investing by providing services that you once needed an expensive personal advisor to receive. And they’ve proved enormously popular. Since its launch in December 2011, Wealthfront has built up its assets under management (AUM) to $11.5 billion.

How it works is simple: You invest your money into a Wealthfront account (there’s a required minimum of $500). You can choose to use a tax-deferred individual retirement account (IRA) if you wish. Funds aren’t held by Wealthfront, but by the Royal Bank of Canada (RBC).

Wealthfront then allocates your investment into an assortment of exchange-traded funds (ETFs).

Like many Robo-investing services, Wealthfront uses Modern Portfolio Theory (MPT) to create an automated asset allocation, taking into account your risk tolerance and financial needs. The platform continually makes sure that the allocation is correct with automatic rebalancing.

Wealthfront Fees & Features Review

Minimum Investment$500
Fees0.25%/year
AccountsTaxable, Joint, Traditional IRA, Roth IRA, Rollover IRA, SEP IRA, Trusts, Coverdell, 529, Non-Profit
401(k) AssistanceNo
Tax Loss HarvestingYes
Portfolio RebalancingYes
Automatic DepositsWeekly, Biweekly, Monthly and Quarterly
AdviceAutomated
Smart BetaYes
Socially ResponsibleYes
Fractional SharesNo
AccessWeb-Based, iPhone App, Android App
Customer ServicePhone: M-F 7A-5P PT; Email
  • Tailored Transfers — Exclusive to Wealthfront. Typically, if you are moving from an advisor or existing brokerage account to a Robo advisor, you have to sell all of your holdings and move-in cash. Instead of this, Wealthfront will transfer your assets into a diversified portfolio over time. This will reduce your tax bill. (However, Wealthfront still recommends that you sell incompatible assets such as stock options or mutual funds.)
  • Referral Program — For every new customer you refer to Wealthfront, you get an additional $5,000 managed for free.
  • Stock Level Tax-Loss Harvesting — This service is available for taxable accounts of $100,000 or greater and makes investing, even more, tax-efficient.
  • External Account Support — Organize all of your accounts in one place with advice on fees, taxes and excess cash.
  • 529 College Savings Plan — Free for the first $5,000 unless you’re a Nevada resident. Nevada residents get $25,000 managed for free (plus all-in fees of 0.43-0.46% per year after that amount deposited). (The reason for this is because Wealthfront’s 529 plan is domiciled in the state of Nevada.) Wealthfront shows you how much you can afford to cover while taking into account your other goals such as buying a home or retirement.
  • Portfolio Line of Credit — A feature unique to Wealthfront. For accounts larger than $100,000, take out a line of credit against your investments. Loan rates are currently 4.75-6.00% APR, and you can borrow up to 30% of the current value of your account.
  • Smart Beta — Wealthfront’s service that helps enhance returns over the market indexes. You need at least $500,000 to enable Smart Beta.
  • Free Financial Planning — You can use Wealthfront’s app completely free, with no required investment or other obligation. All you have to do is download the app.
  • Retirement Savings — Plan for your retirement using Wealthfront’s Path algorithms. Wealthfront will look at all of your accounts — including external accounts — and help you find the best way to reach your retirement goals. Read more about Wealthfront IRA here
  • College Planning — Plan for your child’s college education via the Wealthfront app. Pick the college and the app will calculate exactly how much financial aid you’re eligible for and tell you if you’re on track.
  • Home Planning — Plan and save for your next home purchase, along with receiving custom help and recommendations from professionals. Get mortgage estimates, do some “virtual house hunting” and learn the best way to save for your personal situation.
  • Time Off for Travel — This new planning service allows users to explore the possibility of taking an extended period of time off work. The calculator examines your financial data to answer questions such as “How much time can I afford to take off?” and “Will taking an extended leave impact my other financial goals?”
  • Cash Account(New) — Wealthfront now offers a cash account that pays a 1.82% interest rate, carries FDIC insurance up to $1 million and requires as little as $1 to open. See below for more details.

Free Financial Planning With Path

But let’s back up a step — Wealthfront uses an algorithm called Path that was developed by a team of Ph.D.s to help you reach your goals. Using Path, you can set savings goals for the big stuff: retirement, college and/or a home purchase. This service takes all of your accounts — including external savings, banking and even mortgage accounts — and creates personal financial advice. Path generates scenarios to help you determine if you’re on the right… well… path to meet your savings goals. And if not, it will suggest the best ways to go about doing so. The path is not a separate app; it’s built into everything Wealthfront does.

It’s like having a personal financial advisor that’s software-based.

Not only that, but you can use Path for free with no investment required. In fact, Wealthfront is now the only Robo advisor to offer free financial planning. All you have to do is download the Wealthfront app and Path will get to work for you, with the ability to answer more than 10,000 questions tailored to your personal financial situation.

Wealthfront review can help you answer these questions:

  • How much should you save today?
  • How much will you be worth then?
  • Could you live your current lifestyle at retirement?
  • Are you on track for your child’s college education?
  • Are you saving enough to purchase a home?

Wealthfront Cash Account (New)

If you’re looking for a safe place to park your cash, Wealthfront has got you covered. The service’s new cash account will pay you 1.82% in interest and requires a minimum of only $1 to open. If you’re concerned about safety, don’t be — Wealthfront’s cash account is insured by the FDIC for up to $1 million. That’s four times the coverage you’ll find with a regular bank.

Plus, with a cash account, you’ll have access to Wealthfront’s free financial planning advice and answers to more than 10,000 financial questions.

Review How Wealthfront Works

Wealthfront uses a team of “world-class financial experts” led by legendary economist Burton Malkiel. He’s the author of the investment classic A Random Walk Down Wall Street, which I recommend reading. Malkiel is Wealthfront’s, Chief Investment Officer.

Wealthfront has some similarities to Betterment and other Robo advisors, in that you start by completing a questionnaire. Wealthfront’s questionnaire has four objective questions and six subjective ones. The purpose of the survey is to determine your risk tolerance and to set asset allocations.

Once established, the allocations will remain constant regardless of the amount of money you have invested. After specific thresholds are crossed within your account, the portfolio will automatically be adjusted to ensure it stays in line with the proposed asset mix.

Wealthfront Fees Review

The minimum account size that Wealthfront allows is $500, and there is also a minimum withdrawal amount, which is $250. You cannot draw your account below the $500 minimum.

From our research, for accounts under $10,000, Wealthfront is one of the cheapest Robo advisors, including ETF fees. Annually, expect to shell out 0.25%. However, with our promo link, the first $5,000 in your account is managed free, and amounts above $5,000 have an annual 0.25% fee.

Let’s break it down. On a $100,000 account, the fee would be $237.50 for a full year — and with our exclusive promotional link, the first $5,000 would be excluded from annual fees. The amount of the annual fee will be prorated and withdrawn on a monthly basis. Wealthfront is cheap when compared to the thousands of dollars in fees typically charged by financial advisors.

As mentioned above, there’s another way to have more than $5,000 managed free under Wealthfront. After becoming a Wealthfront customer, refer friends to the service. Each new signup grants you an additional $5,000 of free management.

The only other fee you incur is the very low fee embedded in the cost of the ETFs. From our 60% stocks, 40% bonds portfolio test, we found the ETF fees averaged 0.18%. That gives Wealthfront an advantage over even the deepest discount brokers.

Wealthfront Stock Level Tax-Loss Harvesting

This service is available in taxable accounts. The purpose is to save on taxes, as well as the annual fees an ETF charges. In effect, Stock Level Tax-Loss Harvesting is something like an ETF but managed directly by Wealthfront.

Wealthfront clients can access Stock Level Tax-Loss Harvesting at three levels:

  • Wealthfront 100 — Available to taxable accounts with a minimum of $100,000. Wealthfront uses individual stocks in up to 100 of the largest U.S. companies, and the Vanguard Extended Market ETF (VXF) and the Vanguard S&P 500® ETFs (VOO) to represent smaller companies.
  • Wealthfront 500 — Available with a minimum of $500,000. The account uses up to 500 individual large-company stocks, and the Vanguard Extended Market ETF (VXF) is used to represent non-S&P 500 smaller companies.
  • Wealthfront 1000 — Available with a minimum of $1 million. It extends the previous options and uses up to 1,000 stocks in large companies, and the Vanguard Small-Cap ETF (VB) is used to represent small-capitalization stocks.

Wealthfront Tax Efficiency Review

Tax-loss harvesting works by taking advantage of investments that have declined in value. A tax deduction is generated by selling investments at a loss, which lowers the investor’s taxes. Tax-loss harvesting could result in a larger benefit than what comes from the manual end-of-year approach taken by traditional financial advisors. All clients receive this feature at no additional cost.

Wealthfront’s automated investment service offers five levels of tax minimization:

  • Wealthfront Stock Level Tax-Loss Harvesting — Uses a mix of individual stocks and ETFs to mirror the U.S. stock market.
  • Index Funds — Unlike actively managed mutual funds, index funds have very little turnover, which means you incur much lower capital gains taxes.
  • Intelligent Dividend Reinvesting — Using dividends to rebalance your portfolio throughout the year minimizes sales, leading to lower realized capital gains.
  • Tax Location — Clients receive different asset classes and asset allocations for taxable and retirement accounts to optimize their after-tax performance.
  • Daily Tax-Loss Harvesting — Available in taxable accounts to cover the gains in ETFs with the losses of other ETFs owned with Wealthfront.
  • Risk Parity (New) — Wealthfront’s newest portfolio addition is a mutual fund that uses a risk parity-based strategy. This means a deviation from the standard 60/40 stocks/bonds breakdown in an effort gets higher risk-adjusted returns. You can elect to participate if you have a minimum of $100,000 in your account.

These are important things every passive long-term investor should be considering but in most cases don’t. That’s because either there’s no easy way to deal with these or it takes too much time to research this information. Wealthfront makes the process trivial.

Wealthfront states that tax-loss harvesting and the use of its Stock Level Tax-Loss Harvesting could add more than 2.03% to your portfolio’s annual after-tax investment return, though of course this return is not guaranteed and is partially dependent upon market performance.

Wealthfront Smart Beta Review

This is Wealthfront’s entry into “Smart Beta” to enhance returns over the core market indexes. The option is available to customers who have at least $500,000 with Wealthfront. Best of all, unlike Charles Schwab’s Robo advisor service and the ETFs it uses, Wealthfront’s service is available at no additional charge. Smart Beta is paired with Stock Level Tax-Loss Harvesting to reduce the impact of taxes on your returns. According to Wealthfront, no other Smart Beta service or fund offers this option.

Wealthfront also announced that it’s tax-loss harvesting, Stock Level Tax-Loss Harvesting, and Smart Beta options are all merged into one combined service called PassivePlus.

Wealthfront Portfolio Review

Depending on whether your account is taxable or tax-deferred (e.g., an IRA), the asset allocation and fund selection may be slightly different.

The portfolio Wealthfront creates for you will be based on the ETFs listed below.

Stocks

SectorETFTicker
USVanguard US Total Stock MarketVTI
ForeignVanguard FTSE Developed MarketsVEA
Emerging MarketVanguard FTSE Emerging MarketsVWO
DividendVanguard Dividend AppreciationVIG

Bonds

SectorETFTicker
US TIPSSchwab US TIPSSCHP
US GovernmentVanguard Total Bond MarketBND
MuniiShares National AMT-Free Muni BondMUB
CorporateiShares Corporate BondLQD
Emerging MarketiShares JPMorgan Emerging Markets BondEMB

Alternatives

SectorETFTicker
Real EstateVanguard REITVNQ
Natural ResourcesEnergy Select Sector SPDRXLE

Risk Parity Fund

The newest investment product offered by Wealthfront — and the company’s first mutual fund — the PassivePlus Risk Parity fund aims to deliver higher risk-adjusted returns in different market conditions. It does this by giving your portfolio more exposure to asset classes with higher risk-adjusted returns.

The fund is based in part on a similar offering from Ray Dalio’s hedge fund, Bridgewater, which requires a $100 million account minimum. It will take up 20% of your portfolio or less, depending on you your personal settings. Wealthfront aims to democratize this strategy with a requirement of only $100,000.

To participate in this fund, you must have a minimum of $100,000 deposited. The fund has an annual fee of 0.25%, which will translate to only a 0.05% hike to your regular fee.

The Risk Parity fund is available only for taxable accounts (no IRAs) at the moment.

StructureInvestment MinimumExpense Ratio
Mutual Fund$100K0.50%

Review Wealthfront Pros & Cons

Pros

  • Free for Accounts Under $5,000 — With our special promotion link. Even more, is possible with the refer-a-friend offer.
  • Tax-Loss Harvesting for All Accounts — This is Wealthfront’s speciality. It helps with taxable accounts and according to Wealthfront helps increase returns.
  • Stock Level Tax-Loss Harvesting — When investing over $100,000, it’s a further way to decrease taxes and fund expenses by avoiding ETF fees.
  • Risk Parity — The recently added risk parity option may smooth out returns compared to the traditional 60% stock/40% bond portfolio. However, we question at what cost, and Wealthfront’s performance remains untested.
  • 529 Plan Option — This option makes Wealthfront somewhat unique in that most Robo advisors focus only on retirement planning.
  • Two-Factor Authentication — Either via an SMS text message or an app installed on your phone, you can be assured that your account is protected from hackers gaining entry.
  • Free Financial Planning — You can use Wealthfront’s financial planning service, Path, with no obligation or required investment.
  • Path Considers External Accounts — The Path algorithm considers all of your accounts, even those held outside Wealthfront, to give you a complete picture of your goals.
  • Cash Account — For a minimum of just $1, you can now open a cash account with Wealthfront that pays an interest rate of 1.82% and carries FDIC insurance for up to $1 million.

Cons

  • No Fractional Shares — It’s possible to have cash sitting in your account, not invested.

Wealthfront Review Summary

Overall, Wealthfront appears to be an excellent investment service. We think it’s one of the best Robo advisors, actually. It shines with taxable accounts. Now that Wealthfront offers tax-loss harvesting for all accounts, its service can minimize your annual tax expenses.

If you’re a beginning investor who’s leery of jumping into individual security selection and management, Wealthfront would be an excellent choice. And it’s a superior vehicle for any passive investor since the selection and maintenance of individual securities is completely unnecessary. Such an investor should supplement their Wealthfront position with substantial cash-type holdings outside.

But more active investors can find use here if they supplement with a self-directed account.

But it’s the everyday savers whom Wealthfront is particularly looking to reach. With its Path planning model, you can “set it and forget it” and let Wealthfront do all of the heavy liftings.

For individuals who are looking for a more comprehensive online financial planning app with optional financial advisor advice, Personal Capital is a good option as well.